Of Interest

EphBlog is always available to answer questions from eminent alumni like Arthur Levitt ’52.

Answer: Because you live in a bubble filled with rich, privileged, elitist liberals. Comments:

1) Who is the most prominent Eph supporter of Trump? I have trouble naming a single person. Help us out readers! It could be that I (David Dudley Field ‘1824) am the most prominent. I am still hopeful that a member of the Vast Right Wing Conspiracy, Eph Division, will sign up for the Trump campaign. How about Mike Needham ’04, Oren Cass ’05 or James Hitchcock ’15?

2) The fact that no one (?) on the Williams faculty thinks that Trump could possibly become President is a sign of intellectual group think.

3) The fact that no one (?) on the faculty will vote for Trump is an indicator of the lack of ideological diversity at Williams.

4) There are probably many Trump supporters among the white working class of Williams employees. The Record ought to interview them.

Jennifer Doleac ’03 and Arthur Levitt ’52 both tweeted about this New York Timesarticle: “Why a Harvard Professor Has Mixed Feelings When Students Take Jobs in Finance”

This is a bittersweet time on campus. Seniors are beginning to find jobs, and while their enthusiasm is infectious, some of their choices give me pause.

Many of the best students are not going to research cancer, teach and inspire the next generation, or embark on careers in public service. Instead, large numbers are becoming traders, brokers and bankers. At Harvard in 2014, nearly one in five students who took a job went to finance. For economics majors, the number was closer to one in two. I can’t help wondering: Is this the best use of talent?

I suspect that this prejudice is common among the Williams faculty as well. Exploring it would make for an interesting Record article.

In the meantime, this view is absurd because it is impossible to make meaningful moral judgments about job choice between categories as broad as “public service” and “finance.”

First, I am not claiming that moral judgments are impossible. Consider two jobs that many people might reasonable judge as morally suspect:

Congressional staff who arrange for lobbyists to write big checks so that her boss will support their favorite tax loopholes.

Running the NSA computers which record all our phone conversations.

But notice what those jobs have in common? They are “public service,” positions in which your boss is the US Government. Does the author, Sendhil Mullainathan, “pause” when his students take jobs like these? Or are all public service jobs, by definition, morally praiseworthy?

Second, consider two (well paid) jobs in “finance.”

Protect online bank accounts from hackers and thieves.

Design better (cheaper) index funds.

Does Mullainathan experience “bittersweet” emotions when his students take jobs like these? I hope not!

Third, think about all the jobs that are the same in “public service” and in “finance.” Example:

Doing asset allocation at Calpers. Why is working for Calpers at job X more praiseworthy than working at Fidelity or Wellington or Vanguard and doing job X? Hint: It’s not, unless you think that California retirees are, as a class, more morally praiseworthy than people who invest with Vanguard.

Now, obviously, there are jobs in public service that are morally praise-worthy and jobs in finance that are morally suspect, but Mullainathan is only confusing his readers — and misleading himself? — when he claims that such broad categories provide meaningful evidence for moral judgment.

And don’t even get me started about the largely parasitic existence led by the public relations staff — oops, I mean the tenured faculty! — of the $30+ billion Harvard Hedge Fund, LLC . . .

Earlier this week, two bitcoin-related companies hired former Securities and Exchange Commission chairman Arthur Levitt as an adviser to “help them understand the imperative of a robust approach to regulation.” Yesterday Levitt robustly approached a regulator on their behalf, spending an hour with Ben Lawsky, the New York State Superintendent of Financial Services, who has proposed rather strict regulation of bitcoin infrastructure providers. We know this because Lawsky tweeted about it, calling Levitt a “very special and wise man.” Levitt returned the love, calling Lawsky “a good, fair, reasonable regulator.” It’s somehow fitting that bitcoin lobbying takes place in public, on the Internet.

Kudos to Arthur Levitt ’52 for continuing to rake in the influence peddling dollars in his mid-80s. Impressive!

The Massachusetts special Senate election has not only generated fresh thinking about healthcare reform – it has also given new urgency to financial market regulatory reform

… [Lots of wonkery.]

Though these steps are critical to successful reform, none of it would happen without the wake-up call delivered in Massachusetts. Leaders in both parties now know that voters are frustrated with inaction. Ultimately, what matters most are not issues like banker profits and bonuses, but investor confidence in US markets. That confidence will come from greater transparency. Every regulatory reform must contribute to that goal.

Read the whole thing. Levitt is right to be highly skeptical of some of Obama’s ideas but wrong to think that his own specific regulations are likely to be any more successful. Smart people (like him!) have been regulating financial institutions for 50 years. What has all that work brought us? Disaster.

The only solution is to punish the dumb capital that lent money to suspect institutions like Lehman, Bear, Fannie, Freddie, Bank of America and so on. Allowing Lehman to go bankrupt did more to help the process of reform than 1,000 Levitt regulations because it inspired (at least some!) diligence on the part of the folks who control the capital. They were burned. They will be more careful next time.

But, in my view, they were not burned enough to really learn. We need to let the other bankrupt institutions go bankrupt. That will do more for the cause of financial market sanity than anything else.

Arthur Levitt ’52 interview on high frequency trading. See also his Wall Street Journalop-ed.

The debate over high-frequency trading may seem remote and irrelevant to small investors. After all, they may think, if you’re only buying and selling stocks and mutual funds occasionally, what difference does it make whether some traders are able to move quickly in and out of those same stocks, squeezing an extra penny or two of profit here and there?

But this debate is not just about the rarified world of high-frequency traders, dominated by superfast computing and trading by advanced algorithms. It’s fundamentally about the competitiveness and health of U.S. markets, and the ease with which all investors are able to find willing buyers and sellers. Small investors may never directly use a high-frequency trading strategy in their lives, but they have a very large stake in whether such strategies are regulated out of existence, as is now urged by some in Congress, the media and Wall Street.

High-frequency trading is, in many respects, just the next stage in the ongoing technological innovation of financial markets. Just as paper tickets for trades were replaced by computer orders, and the trading floor seen on television was made largely irrelevant by electronic exchanges, so has high-frequency trading revolutionized the way most U.S. stocks and related investment products are priced and sold.

Read the whole thing. Levitt is 100% correct. For a dissenting view, see here and here.

Worried about all the billions of taxpayer dollars going to AIG? Don’t be! Arthur Levitt ’52 is on the case.

Over a long career, Arthur Levitt has earned a reputation for fighting the good fight. As head of the U.S. Securities & Exchange Commission from 1993 to 2001, he championed the cause of the common investor, shining a spotlight on the potential conflicts of interest auditing firms faced in doing consulting work for clients. His concerns proved all too prescient — witness the meltdowns at Enron, WorldCom, and elsewhere at the end of his tenure.

Now, he’s stepping in to help American International Group (AIG) clean up its accounting problems. As an adviser to AIG’s board, Levitt is charged with aiding in the selection of new independent board members and offering recommendations on governance and best practices.

…

Q: What do you hope to accomplish?A: Clearly, I would hope that AIG emerges as a model of good governance. It’s hard to be formulaic about that. What may be good governance for one company may not be for another. I’m going to help them find the kind of independent directors who have the talents to complement the board as it exists today. I want to examine the committee structure and make recommendations [to AIG CEO Martin Sullivan].

…

Q: How long will this take?A: I hope to complete [the job] in a matter of months.

Oh, sorry! Levitt isn’t going to “clean up AIG” now, after it required a giant bailout. That article is from 2005.

The bank [Goldman Sachs] might be taking all these hideous, completely irresponsible mortgages from beneath-gangster-status firms like Countrywide and selling them off to municipalities and pensioners – old people, for God’s sake – pretending the whole time that it wasn’t grade-D horseshit. But even as it was doing so, it was taking short positions in the same market, in essence betting against the same crap it was selling. Even worse, Goldman bragged about it in public. “The mortgage sector continues to be challenged,” David Viniar, the bank’s chief financial officer, boasted in 2007. “As a result, we took significant markdowns on our long inventory positions …. However, our risk bias in that market was to be short, and that net short position was profitable.” In other words, the mortgages it was selling were for chumps. The real money was in betting against those same mortgages.

“That’s how audacious these assholes are,” says one hedge-fund manager. “At least with other banks, you could say that they were just dumb – they believed what they were selling, and it blew them up. Goldman knew what it was doing.” I ask the manager how it could be that selling something to customers that you’re actually betting against – particularly when you know more about the weaknesses of those products than the customer – doesn’t amount to securities fraud.

Who was the Goldman Sachers in charge of those short positions? Michael Swenson ’89. You go, Swenny!

Taibbi, although a good writer, is fundamentally clueless on this topic. In any large institution, there will be different departments doing/selling different products, often with no knowledge of each other. My local supermarket sells both low-fat yogurt and Ben & Jerry’s Brownie Batter Ice Cream. The former makes health claims that the latter implicitly denies. Yet, there is no “fraud.”

The same applies to Goldman. The Goldman folks selling ABS securities to idiots pension funds and municipalities probably believed (more or less) in what they were selling. It is hard to be a good salesman if you can’t even convince yourself. And — Look at history! — housing prices had never fallen nationwide. Isn’t part of a liberal arts education learning from history?

Swensen, and the other proprietary traders at Goldman, probably had little if any interaction with the people selling to ABS securities. They drew their own conclusions and made their own bets. They did what they were supposed to do: forecast future prices more accurately than the market and position their capital accordingly. No fraud here.

Arthur Levitt Hired by Goldman Sachs Jesse. “Hired” = “Bought”. Levitt was up for some regulatory posts, and when he was the head of the SEC, exhibited a bit of backbone, enough so that he got perilously few board seats when he stepped down.

The linked article notes:

Arthur is often trotted out as an independent analyst and pundit on financial news programs. His name has been floated for some of the top regulatory jobs in the Obama Administration.

Goldman does not require advice from Arthur Levitt. People like Art and Larry Summers are hired for their connections, insider knowledge, and for future services to be rendered. In this case Arthur will be offering to help to shape the evolving regulatory structure as it is ‘reformed.’

As long as Ephs are doing the “reforming,” I have few complaints. See here for a less charitable description.

Well, here’s something amazing. It’s like protocapitalist buddhism: the endless life-cycle continues. Clinton’s SEC chairman, the man who powdered his nose and fondled himself for years and years while companies like Goldman Sachs bilked America with one “Bullshit.com” IPO after another, is now going to work for… wait for it… Goldman, Sachs. Nothing like years of hideously ineffectual non-enforcement to attract those lucrative Wall Street job offers!

More to the point, Levitt was one of the key figures who helped usher in the Financial Services Modernization Act (repealing Glass-Steagall) and the Commodity Futures Modernization Act (deregulating derivatives). Along with Bob Rubin, Larry Summers, and Alan Greenspan, Levitt helped convince Bill Clinton to make two of the most important bad decisions that led to this financial crisis. So it’s really a relief to see that he’s still around helping to liase between Goldman Sachs and the government. That portends well for the rest of us, doncha think?

Fascinating Washington Postarticle on the origins of the financial crisis.

A decade ago, long before the financial calamity now sweeping the world, the federal government’s economic brain trust heard a clarion warning and declared in unison: You’re wrong.

The meeting of the President’s Working Group on Financial Markets on an April day in 1998 brought together Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin and Securities and Exchange Commission Chairman Arthur Levitt Jr. — all Wall Street legends, all opponents to varying degrees of tighter regulation of the financial system that had earned them wealth and power.

Their adversary, although also a member of the Working Group, did not belong to their club. Brooksley E. Born, the 57-year-old head of the Commodity Futures Trading Commission, had earned a reputation as a steely, formidable litigator at a high-powered Washington law firm. She had grown used to being the only woman in a room full of men. She didn’t like to be pushed around.

Now, in the Treasury Department’s stately, wood-paneled conference room, she was being pushed hard.

Read the whole thing. Levitt ’52 has some regrets.

The crisis has prompted second thoughts. Goldschmid, the former SEC commissioner and the agency’s general counsel under Levitt, looks back at the long history of missed opportunities and sighs: “In hindsight, there’s no question that we would have been better off if we had been regulating derivatives — and had a clearinghouse for it.”

Levitt, too, thinks about might-have-beens. “In fairness, while Summers and Rubin and I certainly gave in to this, we were not in the same camp as the Fed,” he said. “The Fed was really adamantly opposed to any form of regulation whatsoever. I guess if I had to do it over again, I certainly would have pushed for some way to give greater transparency to products which turned out to be injurious to our markets.”

Most important lesson is that the origins of the crisis are bipartisan. Both Democrats and Republicans made major mistakes. Our political class as a whole failed us.

Lesson for radical anti-Federalists like me? Less power to the political class. That’s change we can believe in!

Looking for an Eph connection to the Bernie Madoff scandal? Me too! Luckily, there does not seem to be one, at least as far as Arthur Levitt ’52 is concerned.

Ex-Securities and Exchange Commission boss Arthur Levitt yesterday fired back at critics trying to lay at his feet some of the blame for the Bernie Madoff scandal, saying he wasn’t asleep at the switch.
“At this point, I don’t see any evidence that the SEC dropped the ball,” Levitt, who’s now an adviser to private-equity shop Carlyle Group, told The Post.

The 78-year-old Levitt also denied allegations that he had a chummy relationship with Madoff, who last week was arrested on charges of having masterminded a $50 billion Ponzi scheme that has touched everything from hedge funds to charities to European banks.

Some have suggested that Levitt and Madoff were close enough during the eight years that Levitt was SEC chairman that it might have skewed his oversight of the company. Additionally, Levitt said he’s never been an investor in Madoff’s advisory business.

“We were not socially friendly,” Levitt said. “I knew Bernie the way I know [former Citigroup CEO] Sandy Weill or [ex-Merrill Lynch chairman Dan] Tully. He received no special breaks from the commission.”

By 2001, while Levitt was still chair of the SEC, Madoff was already running the largest Ponzi scheme in history. If we can’t blame him, who can we blame? More here.

On the heels of the recent lurid discoveries about Bernard Madoff’s multi-billion-dollar fraud, former SEC Chair Arthur Levitt is quoted in the article as saying: “At this point, I don’t see any evidence that the SEC dropped the ball.”

That comment infuriates me—and likely many others who have spent countless hours this past week listening to the devastation brought upon the life savings of many victims of Madoff’s apparent fraud. It is possible that Madoff made off (sorry for the pun) with billions of dollars of other folks’ money. I think the enormity of the theft needs repeating: Billions of dollars. Billions. And this occurred right under the nose of the SEC, which regulates RIAs and b/ds, and FINRA, which regulates the latter only. We will need to see how this story unfolds to know the extent of the regulatory failure and determine where to point the finger.

Still, what kind of evidence does former Chairman Levitt need in order to recognize that the SEC failed the investing public and the industry? What evidence is required to convince this former industry cop that the streets of Wall Street were not being patrolled … that the squad cars were arriving too late while their occupants were munching on donuts and slurping down coffee?

The stratospheric pay packages of Wall Street executives have become a lightning rod issue as Congress shapes a $700 billion bailout for financial firms. Proposals circulating on Capitol Hill vary, but they all would impose some limits or approval authority on salaries of executives whose firms seek help.

The moves in Washington mirror the popular outcry — in constituent e-mail messages and postings in the blogosphere — over the prospect of Wall Street’s tarnished titans walking away with tens of millions of dollars a year while taxpayers pick up the bill.

…

Arthur Levitt Jr., a former Wall Street executive as well as a former chairman of the Securities and Exchange Commission, said pay curbs on executives whose firms take part in the bailout were essential for Congressional approval and were reasonable.

The finance industry, Mr. Levitt added, will continue to offer handsome salaries for the successful, though not as high as in the boom years. “The golden egg has disappeared,” he said.

The total compensation for any employee of a firm from which the US Government purchases securities under this Act shall not be more than $500,000 per year for the five years after such a purchase.

Again, this is completely voluntary. If Goldman Sachs is so concerned about losing their “stars,” then they don’t need to participate in the bailout. Any firm which is so desperate that it needs our taxpayer dollars should not be paying its executives million dollar salaries/bonuses. And note that a fixed dollar amount avoids having the Treasury try to determine what is “inappropriate or excessive.”

Is there a chance that some executives might leave a firm that needs the bailout and move to one that doesn’t because of this law? Sure! But, first, employment in the finance industry is about to undergo its most severe contraction in a decade. Lots of people would rather have a job that pays $500,000 than one that pays nothing. Second, any person who did stupid things during the bubble both a) Deserves a pay cut and b) Is unlikely to find many other firms that want to hire him. Third, only a small number of people will move because of this law, but they will be those who are truly valuable. It is probably better that such folks work at firms that don’t need the bailout. Their talents will be put to better use.

There will never be a better opportunity to decrease income inequality in America, at least at the high end. If not now, then when?

Economist Robert Shiller mentions Arthur Levitt ’52 in a New York Times op-ed on “How Wall Street Learns to Look the Other Way.”

I like to assign my finance students “Take On the Street,” an account by Arthur Levitt of his efforts, as chairman of the S.E.C. in the 1990’s, to clean up the sleazy side of Wall Street. I wish more professors assigned it. But most of my colleagues tell me they do not have time for it; too many formulas to cover.

Shiller’s claim is that an excessive focus on formulas and a reverence for the “market” makes business folks blind to things, like Richard Grasso’s wildly excessive pay package. See other commentary here.

Arthur Levitt ’52 was one of the more successful chairmen of the SEC. Although he has yet to be quoted on the recent indictment of Ken Lay, you can read his thoughts on Enron and other matters here.

Despite Levitt’s successes on several issues — and his fighting the good fight on things like option expensing — he did little or nothing on out-of-control executive compensation. For a champion of the little guy, like Levitt, this is somewhat surprising, especially since it would not be that hard a problem to solve.

The SEC should pass a regulation requiring that all publicly traded companies allow their shareholders to vote on the following (binding) resolution each year.

The total compensation of both the CEO and the CFO shall not exceed $1 million in the coming fiscal year.

Those who dislike government meddling in business have little to complain of here since the government isn’t telling any business how to set salaries. The government is just requiring that business owners be allowed to vote on a specific option.

What would happen of such a regulation were in place? Senior executives would complain long and loudly. Many large shareholders — especially pension funds — would gladly vote for lower compensation. Many mutual funds would feel pressured to do so. My guess is that the resolution would pass at many companies.

There would then be significant (downward) pressure on executive salaries across the board. If you’re the CEO/CFO of a big company, there are very few employees who you think should be paid more than you are. Of course, this won’t allow you to pay people (much) less than they could get elsewhere, but the number of people for whose services the “market” is willing to pay more than $1 million per year is small. The very best baseball players, rock stars, entrepeneurs and Wall Street traders would still make millions, but only because any attempt to lower their pay would cause them to go elsewhere with their services.

Some would say that this plan won’t work since the companies whose shareholders agree to pay more than $1 million per year (whether they be public or private companies) will snap up all the “best” executive talent. Maybe. But, as Jerry Useem ’93 points out, our ability to measure executive talent is so limitted that it would be hard for any company to easily identify a CEO candidate who is significantly better than many other candidates for the job.

There is a sense in which such a scheme, if implemented, would amount to implicit collusion among the employers of senior executives. Perhaps. But collusion in the service of class warfare is no vice.